Monday, 29 July 2013

CBN Policy: Banks To Lose N45bn In Interest Income

Sanusi Lamido Sanusi

The earning potential of banks across the country has received a major hit following the Central Bank of Nigeria’s decision to increase cash reserve requirement (CRR) on public sector deposits to 50 per cent up from 12 per cent.

Financial experts estimate that banks would lose no less than N45 billion in interest income following their inability to utilise 50 per cent of the deposits from the three tiers of government and their agencies.

The CBN’s Monetary Policy Committee led by Governor Sanusi Lamido Sanusi introduced a 50 per cent cash reserve requirement on public sector funds on Tuesday after warning about the risk of excess liquidity in the system.

As a result of this policy, banks must keep as reserves 50 per cent of all deposits collected from the federal, state and local governments and all ministries, departments and agencies (MDAs) of government, thus reducing liquidity in the system.

The apex bank however left its benchmark interest rate at 12 per cent for the 11th consecutive meeting to protect the naira.

The decision is expected to have a “negative impact on the banking sector”, Muyiwa Oni and Rele Adesina, analysts at SGB Securities Limited in Lagos, wrote in a report yesterday.

The move may result in the loss of N45 billion ($281 million) interest incomes for the banking industry, the duo noted in the report.

In the first quarter, “public sector funds in the banking sector stood at N2.5 trillion, which was 17 per cent of the banking sector’s deposits”, the analysts said.

Already, the CBN’s move has impacted on the Banking Index on the Nigerian Stock Exchange which fell the most in a month after the apex bank tightened monetary policy by increasing cash reserve requirements for public sector funds to 50 per cent, damping the outlook for lenders’ margins.

The NSE Banking Index, which tracks the 10 largest banks by market value, declined 3.9 per cent to 404.84 yesterday, the lowest drop since June 28, data compiled by Bloomberg showed.

Zenith Bank Plc, the second-largest bank by market capitalisation, tumbled 5.1 per cent to N20.1 naira, the most since June 25. Guaranty Trust Bank Plc, the biggest, dropped 3.5 per cent to 25.39 naira.

“The CBN was concerned about the build-up in excess liquidity in the financial system and a vicious cycle where banks sourced large amounts of public sector funds and subsequently lent them to the government by purchasing T-bills and Open Market Operations,” Samir Gadio, a London-based emerging-markets strategist at Standard Bank Group Ltd., said in an e-mailed note yesterday.

The newly-introduced reserve requirements “could also result in a sharp increase in Nigeria’s interbank rates,” which may impact some lenders’ net interest margins negatively because of the higher cost of funding, the analysts at SGB said.